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Critics such as liberal think-tank ITEP continue to impales themselves on the job creation data from no-income tax states.

Critics have recently attacked the economic growth and job creation records on no-income tax states. Organizations such as ITEP have published articles attacking no-income tax states and defending the failures of high tax states. It’s important to look at the claims they make in order to decipher the twisted logic by which they seek to defend the indefensible records of failure of such states as New York and New Jersey.

ITEP begins by criticizing Arthur Laffer and the Laffer curve by calling it “junk” economics. It’s important to tackle these claims head on and define what the Laffer curve is and what it isn’t. The Laffer Curve is a complex topics, but several key points are worth highlighting.

The relationship between tax rates and tax collections is dynamic not static. In the real world, lower marginal tax rates result in more economic growth, less tax evasion and more tax revenue than a static analysis would suggest. Correspondingly, higher marginal tax rates result in less economic activity, higher tax evasion and less tax revenue than under a static analysis.

The objective of tax policy is to fund the government, not “maximize” the size of government.

For more information about the Laffer Curve, see this excellent series of videos from the CATO institute. Laffer Curve: Part 1, Part 2, Part 3.

In its analysis ITEP claims that there is virtually no difference between no-income tax states and the nine highest tax states. Specifically, ITEP chooses to focus on median income, gross-state-product (GSP) per capita and unemployment rates. For starters, median income per capita and GSP per capita are highly correlated; so much so that we often use these terms interchangeably. ITEP says that both are higher for the highest tax states than they are for the no-income tax states. This is true, but ITEP is conveniently silent about the change in these numbers over time. While the nine highest tax states (they are Hawaii, California, Maine, Maryland, New Jersey, New York, Ohio, Oregon, Vermont) do have a higher median income the no-income tax states (they are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) are not far behind and have income per capita that is growing faster.

In 2000, the no income tax states had and an average earnings per worker (adjusted for inflation) of $50,542 while the nine highest tax states had a corresponding $54,432. In 2009, the no income tax states average earnings per worker had grown to: $54,566 while that of those in the 9 highest tax states had grown to $57,525. In other words, the no income tax states experienced growth of 8.63% vs. 5.75% for the nine highest tax states. So the nine highest tax states began wealthier and are still wealthier (per capita), but the no income tax states are closing the gap.

Secondly, ITEP acknowledges that the gross state product of no-income tax states is growing faster but attributes this growth to population growth. Here lies the crux of ITEPs twisted logic. Why is the population in no-income tax states growing much faster than the population in the highest tax states? ITEP would have us belief that population growth is independent of tax policy (economists call this an exogenous variable), i.e. population growth just happens and part of some “long term trend” as if migration trends were unchangeable laws of nature. In other words, ITEP believes that people are moving to no-income tax states for reasons that have nothing to do with economic growth or jobs.

Imagine a couple living in New Jersey. What is more likely: this couple decides one day that they will move to Texas (for any possible reason but not related to work) and once they get there the Texan economy automatically “creates” a pair of jobs for this couple. Or, the couple look for better jobs (perhaps one has been laid off), and find a job is offered in Texas and they decide to move to Texas for that reason? The first reasoning is what ITEP want you to believe. They claim people move because of “long existing migration trends” that in their opinion have nothing to do with taxes or the economy. I think that the second explanation is more likely; people move to where the jobs are.

The reality is that jobs are being created in no-income tax states and jobs are being lost in the highest income tax states. It is this pattern of job creation that is causing people to move. The US Census migration survey detailing the net migration of people between US States shows a clear trend of people leaving the highest income tax state and moving to the no-income tax states. Between 2005 and 2009, the highest income tax states lost -2,210,492 people due to migration while the no-income tax states gained 1,214,273 people due to migration during the same time period. See the tables at the bottom of this article for the detailed data.

An even starker contrast between no income tax states and the highest tax states emerges when one looks at job creation; something ITEP conveniently omits. Instead ITEP conveniently focuses on unemployment rates which mask changes in population and labor force participation. ITEP correctly points out that there is little difference in unemployment rates between the no-income states and the highest tax states. ITEP forgets to mention that millions of people have left the highest tax states while millions have moved to the no income tax states; in other words they omit to mention that the highest tax states lost jobs while the no income tax states created millions of new jobs. According to the Bureau of Labor Statistics, between January 2001 and January 2011, no income tax states created 2.1 million net new jobs while the highest tax states lost over half a million net jobs.

In summary, critics’ continued attacks on the job growth miracle of no income tax states are baseless. The highest income tax states are losing jobs and population, while the no-income tax states are gaining both jobs and people. Criticisms relating to median incomes that don’t look at changes over time are baseless as are comparisons that don’t correct for the differences in the costs of living. People are moving to where the jobs are, and jobs are being created by no-income tax states and are being lost by the highest tax states. It is time for Missouri to get on the job creation bandwagon.